By Andrew Davies, VP of Global Market Strategy, Financial Crime Risk Management, Fiserv
Beneficial ownership has come to the forefront for anti-money laundering (AML) compliance professionals around the world. This is due to recent guidance from the Financial Action Task Force on Money Laundering (FATF) and specific local legislation and rules from organisations such as the U.S. Financial Crimes Enforcement Network (FinCEN) and the Monetary Authority of Singapore. In Europe, the introduction of the 4th EU AML Directive means that all European Union members are now obliged to have central registers where ultimate beneficial owners of registered entities are made available to financial institutions (FI). Despite these recent developments, global AML standards have long dictated that understanding beneficial ownership and those with a controlling stake in the organisation is an essential part of a FI’s AML program.
Beneficial ownership outlines the identity of persons with a controlling interest in a privately-held business, enabling an FI to understand the ultimate recipient of a financial transaction. Understanding beneficial ownership is also vital to support the discovery of tax evasion and for compliance with legislation such as the United States Foreign Account Tax Compliance Act (FATCA) and the new global Common Reporting Standard (CRS).
A complex task
In the 2014 KPMG Global AML Survey, respondents stated that “identifying complex ownership structures is the most challenging area in the implementation of a risk-based approach to KYC [Know Your Customer] collection”, particularly where an intermediate entity resides in a authority where AML regulations are not as strict or data privacy requirements are particularly solid.
New legislation strengthens requirements on FIs to identify the beneficial owner of entities conducting financial transactions to avoid non-compliance and possible harsh penalties at both account opening and ongoing. This increases the importance of regular KYC reviews of customers with complex or high risk ownership structures, So that the FI can be satisfied they know the ultimate beneficial owners and supporting ownership structure, they have to undertake reasonable measures to verify their identity and that of the entity conducting the transaction. These measures include understanding the ownership and control structure of a corporate customer. An example of a proof of ownership for a corporate customer includes copies of the share certificates, register of shareholders, or bylaws extracted from the company registries or chamber of commerce.
Adding additional complexity to the process is the fact that understanding beneficial ownership also goes further than traditional corporate customers to include other legal entities, such as trusts. When it comes to a trust, FIs must also acquire proof of ownership, for instance through a copy of the Declaration of Trust, which identifies the settlor and trustee, among other important information. Such trusts are often setup in offshore jurisdictions with a low level of transparency.
Hiding behind the veil
Verifying ownership of a publicly held entity or on a simple company structure can be relatively pain free. Public companies are subject to regulatory disclosure requirements, therefore it isn’t necessary to seek to identify and verify the identity of any shareholder. For private entities with simple structures, FIs can check the company registry or chamber of commerce, or can ask the client to supply a certified extract from chamber of commerce data with the shareholder information. In addition, some companies provide access to a beneficiary ownership database consortium, where information can be easily searched for and verified.
However, where there are complex legal structures in place things can start to get complicated. This is especially true in offshore jurisdictions because corporate vehicles here often have limited disclosure and recordkeeping requirements. This means that FIs have to rely on information provided directly by clients or on public records in that jurisdiction to discover the true owner which have limited to no information. It can be a challenge to identify the beneficial owners that are behind trusts and offshore corporate entities.
Complex structures are often intentionally used to hide the true owner of assets. There can be multiple ownership layers with different types of corporate entities in different jurisdictions, including trusts or private foundations, as well as different terminology, further obscuring the true owner. In addition, many offshore entities are set up to be very flexible, enabling the transfer of ownership from jurisdiction to jurisdiction. These intricate layers make it a struggle for FIs to verify the customer.
The role of technology
Offshore legal operations don’t always mean that fraudulent financial transactions are taking place. There are a number of businesses who use offshore entities and sophisticated legal structures for valid reasons such as asset protection, estate planning, privacy and confidentiality. FIs need to be extremely careful when distinguishing between legitimate and suspect activities. The level of risk associated with the entity is determined by the FI and dictates the level of customer due diligence or enhanced due diligence measures required.
To help FIs better understand document beneficial owners, how to determine suspect activities and decide the appropriate level of due diligence required, the role of technology comes into play. Technology enables FIs to map complex organisational structures, document the owners and their findings, automatically link ownership data and create a scheme that illustrates the beneficial owners and the relationships among related entities, such as service providers.
In addition to this, technology solutions can facilitate integrity checks on all parties involved in the ownership structure. FIs require this capability as they need to be able to double check all names against watch lists or research what publically available information there is on that entity in real time. With the number of strict rules and regulations being placed on FIs to identify beneficial owners, having the right technology to assist with breaking down complex structures and lifting the veil on those entities brings great benefits and makes for a more agile and efficient process.